White Box Systems

NFV/SDN Not Floating Vendor Boats – Analysts

BALTIMORE -- MEF16 -- The investment picture for telecom hardware and software vendors looks a little bleak, two industry analysts said this morning, noting that virtualization is not yet generating major spending by network operators and the explosion of M&A deals may also slow major capital investment.

Spending on optical gear and fiber is strong, noted Michael Genovese, managing director and communications equipment analyst for MKM Partners , and router sales continue to go up to support greater bandwidth, but falling prices are keeping revenues flat.

But investment opportunities in the NFV/SDN space have yet to materialize, he noted, with a lot of smaller software companies struggling to differentiate themselves.

"I want to be able to talk to my clients about winners in NFV and SDN," Genovese noted, "but I don't have a stock to point to. Unless you are a venture capitalist, it's hard to invest in this market."

There are network operators moving forward -- he cited AT&T -- but they have not yet identified key vendors with whom they are working and are instead looking at doing a lot of work on their own.

"I haven't heard a carrier say, 'here is a really good small software provider and we are going to grow with them for a long time,' " Genovese said.

Meta Marshall, vice president of equity analyst for communications systems and applications at Morgan Stanley , agreed the virtualization market is progressing slowly as an investment opportunity and took it a step further. She noted that many vendors invest heavily to meet Tier-1 service provider expectations early on in a new technology market and count on making their profits selling to later-moving players such as smaller network operators.

"The amount of time when a technology provider can capitalize on all the investment they are putting into Tier 1s is getting longer," Marshall said. "That puts margin pressure on [the vendors] because they are investing more in services and it will take longer before they see market opportunity."

Want to know more about SD-WAN strategies? Check out our dedicated SD-WAN section here on Light Reading.

Genovese pointed to the SD-WAN area as a good example of what is currently happening. There are a number of small vendors in this space, with software-based SD-WANs or appliances, and they are winning business from some of the bigger carriers, but none has broken out as a major success. And more than likely, if one of them does, they will quickly be acquired by a bigger player, before investors can take advantage, he said.

Both analysts said the major M&A activity stands to slow down investment as well, in part because the two players take a pause to reassess spending plans as part of the integration process, but also because money that might go to organic growth is instead put into the acquisition, Marshall noted.

Other things putting pressure on vendor profits are the slowdown in spending on the wireless side as that industry prepares to address 5G wireless, Genovese noted, and the growth of interest in white boxes.

Open source is another industry force, and the financial analyst said that is pushing vendors toward a services strategy as they deliver open source-based solutions but provide the distribution of the software and the ongoing integration and support.

— Carol Wilson, Editor-at-Large, Light Reading

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kq4ym 11/22/2016 | 1:13:27 PM
Re: Lack of investment ideas in NFV space? Maybe there's some truth in the idea that " Unless you are a venture capitalist, it's hard to invest in this market." If there's no real clear cut way to a profit in a reasonable amount of time nor a clear profitable firm showing as yet, it does seem that the only way to get investment may be through the VCs who gamble that a small percent of their investments will pay off big time, but don't know which one.
Co-Found17286 11/12/2016 | 3:22:01 AM
SDN/NFV is still ill defined So while I agree the success stories are yet to emerge, that may not solely be because of a lack of movement in the space but it mat also be because of a lack of maturity in what is defined as - in particular - NFV. At Content Delivery World in london this week - which I chaired - there was discussion about almost universal testing of 'virtualisation' but there is a clear lack of 'orchestration' maturity. Everyone gets the business case and the idea of microservices, and the value they bring, but it requires significant layer 1/2 changes before they can roll out and at layer 4 there needs to be either a standard way to make all networks dance (perhaps where ETSI and OpenStack are trying to get to) or things have to be task / business case focussed and relatively proprietary - such as my own company services. Indeed we have been doing so since 2009, long before the terms microservices and NFV were introduced and we don't use the terms explicitly because we are cautious about the expectation of interoperability that calling things 'NFV' may bring to our 'virtualised' capability. So it may be that virtualisation of operator networks is far more extensive than perceived but that folks are cautious about referencing 'SDN/NFV' when the terms are still frankly quite ill defined (even though marketing and analysis seems to treat them as if they are precise descriptions).
microcaptechinvestor 11/11/2016 | 3:56:35 PM
Re: Lack of investment ideas in NFV space? Interesting view from industry analysts/investors not reading the tea leaves here. Traditional vendors complaining about CSP capex spend way down. Yet Radcom is in trials with 9 Tier-1 CSPs (for a $200 market cap with $30m revenue run-rate in 2016), while NTCT, ERIC, NOK and others continue to warn about revenue. Radisys is seeing significant traction with DCEngine. Gigamon is accelerating revenue growth, and sold into a Tier-1 CSP for an NFV engagement last quarter.

Winners are beginning to emerge for public stock market investors.

CSPs move slow, and they are moving very carefully here given the magnitude of the shift to cloud architecture. But for those truly disruptive players with "cloud native" VNFs, selling solutions to CSPs in the fashion they want (no proprietary hardware appliances coupled with proprietary software) a tidal wave of orders from the world's largest CSPs could come crashing in. A good problem to have for investors in these stocks!
Carol Wilson 11/11/2016 | 11:32:22 AM
Re: Lack of investment ideas in NFV space? I probably was aware of the AT&T/Radcom tie at some point but it honestly didn't pop up in my aging brain as I was writing this story.

I think there are success stories out there and successes in the making - these financial analysts are looking at the big picture and not seeing the kind of impact that a lot of us thought NFV/SDN would have in terms of bringing smaller innovative software companes to the fore. 

It may also be that until there is an infrastructure in place to support VNFs and a process for onboarding them that is more universal, it's harder for smaller software players to make an impact. 
microcaptechinvestor 11/10/2016 | 4:53:19 PM
Re: Lack of investment ideas in NFV space? A few private investors are blogging regularly about Radcom.

inkstainedwretch 11/10/2016 | 4:27:55 PM
Enlightenment sought With a few exceptions (down, Radcom! Down!), small companies haven't been able to distinguish themselves.

We have box companies like Huawei telling their customers they don't want to sell them boxes, they want to provide services. (See Ian Morris' story).

My conclusion from just these two data points is that the big box companies have to develop (or buy) software expertise. Presumably they are doing so. Presumably that would mean that these new companies have to edge out competitors that are much larger, that are already working with customers on hardware/architecture, and that are already in the process of ingratiating themselves further by providing services and software.

So, unless the big box incumbents don't develop software expertise, or utterly fail with the software they supply, what's the opportunity for a new small competitor other than being bought by a big box company?

I'm an outside observer trying to make sense of all this. What do people closer to the business see?

-- Brian Santo
Technica56000 11/10/2016 | 3:34:27 PM
Re: Lack of investment ideas in NFV space? Hi Carol - I'm curious, before the comments to the article were you familiar with the Radcom/AT&T relationship?  I'm just trying to get a sense of whether the story of what has transpired between Radcom/AT&T is out there or still mostly under the radar.
mendyk 11/10/2016 | 3:30:16 PM
Re: Lack of investment ideas in NFV space? As everything moves closer to open source, doesn't the "investor opportunity" diminish?
Carol Wilson 11/10/2016 | 3:13:06 PM
Re: Lack of investment ideas in NFV space? They are paying attention, I assure you. But they may pay more attention to Radcom now!

And before the Affirmed Networks' folks weigh in, Mike Genovese did mention that company's AT&T deal in his discussion. 
Founding38712 11/10/2016 | 3:04:56 PM
Radcom NFV vProbes Radcom has NFV SA/CEM and more products in AT&T and not only is it the eyes of the EComp platform its also a key part in AmDocs Orchestration MANO .   Furthermore, Radcom in engaged with 9 CSPs and 4 have said are acclerating NFV plans.  With AT&Ts very public strong endorsement and strong engagments, this little company is exciting CSPs with both its Hybrid apporach and pure NFV approach to address both current and future needs.
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